What is a spending phase 'Spending Phase'

The spending phase is the the period in a person's life following retirement during which a person is no longer earning income and is living off government subsidy, retirement plans, investments or money or other assets saved for retirement.

BREAKING DOWN 'Spending Phase'

The spending phase of life is a central concept in the life-cycle theory of investing, which states that individuals should invest early in their lives in education and housing, accumulate assets in the middle of their lives during years of peak earning potential, and then spend down those assets in old age. During the spending phase of a person's life, expenses related to raising children, like schooling, clothing and recreation expenses will likely decrease because children have already left home. Therefore, even though individuals  in the spending phase of their lives often see their income  decrease substantially, expenses often will decline in tandem. A retired person in the spending phase of their life will usually no longer have children to support, while other expenses, like a mortgage, are usually paid off. The principal goals of a person in the spending phase are often traveling, relaxing and enjoying retirement.

Spending Phase and the Life-cycle Theory of Investing

The life-cycle theory of investing plays an important role in how experts think about personal finance at various stages of a person’s life. The life-cycle theory of investing justifies heavy investment in things like education, even if a person must go into debt to get a degree, because such credentials increase a person’s earning power during the accumulation period of life.

The concept of the accumulation period of life guides thinking towards how people should think about economic decisions in the middle of their lives. In the modern economy, a typical worker’s pay rises quickly while in their twenties. Starting in one's 30s and 40s, pay increases tend to level off, with workers reaching their peak earnings in the their early 50s. During this roughly twenty-year period, it is most financial responsible to try to max out earnings and save aggressively for the future. Those saving for retirement should look for higher risk and higher reward investments in the early stages of the the accumulation phase, while shifting to safer investments in the later stage. 

The spending period is when you reap the benefits of saving during the accumulation phase. Those who have saved wisely and enjoyed good fortune should have enough wealth to maintain their standards of living.

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